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State backing for R&D is declining

Growth is a permanent feature of western economic discourse, with politicians of all stripes promising to deliver it as the path to prosperity. Of course, economists have long since known that growth is only possible through innovation, so it is perhaps no surprise that governments around the world are investing heavily in innovation.

You have reports like the annual INSEAD/WIPO innovation index that attempts to examine some of the ways in which nations support innovation, whether it’s providing a strong legal/financial framework, making it easy to create new companies, an educated workforce or a strong higher education sector.

This latter area is something of a gray area, as how much of research should be done by public vs the private sector is a debate that has never really reached a satisfactory conclusion. A recent report from the OECD does appear to suggest however, that state involvement in science and technology research is in decline.

Government appetite for innovation

The report revealed that state spending on R&D fell in 2014 for the first time since the report began being published in 1981. This is after a few years of flattening expenditure after a peak was reached in 2010.

Countries from the United States to the United Kingdom, France to Australia have all seen R&D spending drop as a proportion of overall expenditure.

What’s more, the report suggests that this decline may be about to become even starker, as areas such as health and pensions take up ever larger portions of overall state spending.

Couple this with slowing growth in the economy and a private sector that is increasingly taking advantage of global tax opportunities to reduce the amount of tax they spend, and there is a shrinkage in budget opportunities for things such as science and research. The report estimates that this ‘tax efficiency’ alone has denied governments between $100 and $240 billion a year.

Infrastructure support rather than direct spending

As a result of this, the report suggests that most governments are moving towards more policy related instruments that can be implemented with much less cost than directly funding research. These include things such as changing tax incentives for R&D or modifying procurement procedures in the public sector to support innovative start-ups.

This trend is clear in a number of countries in which there is a clear shift from tax revenue going towards government funded research projects towards tax relief for corporate R&D spending.

There has also been a growth in philanthropically funded research, which has grown to represent 30% of the research funding in many top American universities.

To add further grist to the mill, Oxford University recently announced that its Oxford Sciences Innovation Fund had swelled by over £300 million in the past year. Alas, all of that money came from five investors: three from China, one from Singapore and one from the Middle East.

“It does speak to the disappointing investment by British industry in research and development,” the university say. “In fact, 40% of the R&D spend in the UK is by subsidiaries of foreign companies. British businesses are very loath to invest and that really has to change.”

So if government is holding back on investing in innovation, and companies also seem reluctant to commit, who is going to be innovating in the coming years?